1) What are the three functions of money? Which function is the most important?
The three functions of money are that it is a medium of exchange, a unit of account, and a store of value. The medium of exchange is the most important one.
2) How is the discount rate different from the federal funds rate?
The difference between the federal funds rate and the discount rate is that the federal funds rate is the interest rate on advances AMONG private banks, whereas the discount rate is the interest rate on the discount loans completed by the Federal Reserve TO private banks.
3) Consider the balance sheet for the Wahoo bank as presented below.
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Wahoo Bank Balance Sheet
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Assets
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Liabilities
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government securities
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$1,600
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Liabilities: Checking accounts
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$4,000
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Required Reserves
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$400
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Net Worth
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$1,000
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Excess Reserves
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$0
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Loans
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$3,000
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Total Assets
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$5,000
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Total Liabilities
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$5,000
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Using a required reserve ratio of 10% and assuming that the bank keeps no excess reserves, write the changes to the balance sheet for each of the following scenarios:
a. Bennett withdraws $500 from his checking account.
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Wahoo Bank Balance Sheet
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Assets
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Liabilities
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Government securities
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$1,600
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Liabilities: Checking accounts
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$3,500
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Required Reserves
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$350
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Net Worth
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$1,000
|
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Excess Reserves
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$0
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|
|
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Loans
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$2,820
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|
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Total Assets
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$4,800
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Total Liabilities
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$4,500
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b. The Fed buys $1,000 in government securities from the bank.
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Wahoo Bank Balance Sheet
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Assets
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Liabilities
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Government securities
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$600
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Liabilities: Checking accounts
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$4,000
|
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Required Reserves
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$400
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Net Worth
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$1,000
|
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Excess Reserves
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$0
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|
|
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Loans
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$4,000
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|
|
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Total Assets
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$5,000
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Total Liabilities
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$5,000
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4) Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, which of the following scenarios produces a larger increase in the money supply, explain why.
a) Someone takes $1000 from under his or her mattress and deposits it into a checking account.
If the required reserve rate is 10% on $1000, the total that would be deposited would be $900. The increase in the money supply follows the 1/.1 multiplier, this equals 10 so it would increase the total money supply to $9,000.
b) The Fed purchases $1,000 in government securities from a commercial bank.
When the Fed purchases $1000 in government securities the increase in money is direct with no required reserve the government's purchase can directly go into the multiplier formula. This would be $1000 x 10 = $10,000, so this purchase adds more to the supply.
4) Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, what is the value of government securities the Fed must purchase if it wants to increase the money supply by $4 million?
To solve this proble we will bneed to solve for x: 10=$4,000,000; divide both sides by 10 so it would then be x= $4,000,000/10x = $400,000. So the government must buy $400,000 in securities.